The Budget Deal Update Jude Wanniski June 2, 1997

Members of the 105th Congress are today dribbling back into town after a 10-day holiday. What a difference they find. President Bill Clinton has been crippled by a unanimous Supreme Court decision in the Paula Jones matter, with almost no possibility that he can survive with any moral authority intact. The Democratic Party that had a united front for the past two years in confronting GOP governance is splitting down the middle. House Minority Leader Richard Gephardt is running off with the AFL-CIO, leaving Vice President Albert Gore with a crippled boss and a White House staff that is itching to get out of town to make some money. At last, Republicans should be feeling the center of gravity shifting in their favor, but they obviously do not. When they left town, House Ways&Means Chairman Bill Archer was left with the interesting task of shoe-horning a size 12-tax cut into a size 6 budget shoe. House Speaker Newt Gingrich and his protégé, House Budget Chairman John Kasich, had been saying it would all work out just fine. According to the National Review, Gingrich was promising dynamic scoring to make the shoe fit. This morning, however, Congress picked up The Washington Post to read in Robert Novak’s column that Newt has no intention of helping Bill Archer make the shoe fit. Why? Because he is afraid of President Clinton. “The Clinton administration is not going to agree to dreaming up new revenue,” says Newt.

What’s to fear? Gingrich would have to ask the Congressional Budget Office to do what Jack Kemp recommended in a letter he sent Newt and Senate Majority Leader Trent Lott last Friday. Kemp pointed out that the CBO now estimates the economic and budgetary effects of balancing the budget, and calculates a “Fiscal Dividend” of $77 billion over five years. Kemp says that CBO should also “estimate the positive economic effects of adopting the tax proposals presently under consideration by the tax-writing committees. Call it a ‘Growth Dividend’ from tax rate reductions...This represents a golden opportunity to expand the scope of the tax bill while staying within the confines of your agreement with the President. But to make it happen, [the leadership] will have to write [CBO Director] June O’Neill a letter requesting that CBO perform this analysis in its mid-year re-estimates of the budget. I suspect that both Chairmen [Bill] Roth [of Senate Finance] and Archer would be most willing to co-sign such a letter with your leadership. We must not allow this opportunity to pass.”

Gingrich does not want the opportunity. He told Novak: “I wish Jack Kemp were vice president. Maybe he and I could talk President Dole into signing his tax bill. The Clinton administration is not going to agree to dreaming up new revenue.” On the "Evans&Novak" CNN show this past weekend, Kemp discussed his letter and said he saw no reason why President Clinton would not agree to signing a bill that would incorporate the growth effects of the tax cuts. Indeed, if CBO found that the tax cuts added 0.1% to economic growth over five years, producing an extra $30 billion in revenues, the President would have every reason to hail the news and sign the legislation. How could he explain a veto of a tax cut that he knows would produce some higher level of economic growth? Treasury Secretary Bob Rubin may be willing to recommend a veto, as long as he does not have to take a polygraph test. But Rubin isn’t the President and he isn’t hanging on the ropes as is the President. If he were to veto the legislation over a positive CBO growth estimate, the Republicans would assemble every one of their votes in the House and Senate to override, and they would get most of the Democrats too. Only the class warriors would stand with Gephardt, and the voters would know who they are in time for the November 1998 elections.

While Congress was on holiday, Kemp showed the first signs this year of exerting himself on behalf of the party’s growth wing. Perhaps emboldened by recent Wall Street Journal editorials that took shots at Kasich and Lott for wobbly leadership, Kemp essentially has said that he will no longer go along with his old amigos unless they assert themselves on behalf of Reaganesque principles. He was emphatic on "Evans&Novak" in denouncing the idea that a balanced budget should be the party’s primary goal. When asked if he would have voted for the budget deal, Kemp said he would have but only as a first step in a process, the next step being critical to his continued political support. In his letter, he said: “I believe your deal holds out the possibility of leaving us better off at the end of the day than we would have been without it. However, that possibility will become a reality only if the tax bill that emerges is truly a significant growth-oriented, permanent, across-the-board tax reduction on work, saving and investment. If it is not, I believe we should reassess the value of the deal.”

Kasich does not seem to understand that neither Kemp nor the supply-siders are criticizing him for the deal he struck as a first step, but of allowing himself to be cowed by the White House into settling for the $77 billion fiscal dividend and leaving a growth dividend of perhaps an equal amount on the table. The GOP leadership team is hiding behind the argument that the voters elected Clinton, so Republicans have to roll over and play dead. In a letter to the WSJ this morning, Kasich says “[L]ike it or not, just over six months ago the American people elected both a Republican Congress and a Democrat president, and that Democrat president would veto anything we put forth on our own. The message voters delivered last fall was ‘work it out together.’” Well, yes, but in their wisdom, the voters gave the Republicans control of the Congress, and Congress controls the process by which CBO and the Joint Tax Committee project growth and revenues. The President has nothing to say about that process. The only power he has in this regard is the veto, and he will only use the veto if Republicans use negative revenue estimates to cut the school lunch program. If Kasich can’t understand that, I have a spot for him in the corner, with a stool and a tall pointy hat. He may need one anyway. In his Journal letter, Kasich actually boasts of projecting growth rates of only 2.1% per annum.

In finally taking some warm-up swings at his old buddies, Kemp went well beyond an argument for a capital gains tax cut. He said the tax bill should include an across-the-board cut in the estate tax, retroactive indexation of both capital gains and the estate tax, and a repeal of the Clinton 1993 income surtax. If such a bill were written and run through the CBO and Joint Tax computers, we at least would know how the computers were programmed. And if it turns out they are being programmed by dummies, Gingrich and Lott would be accountable for allowing our public finances to be dictated by dummies. In any case, Kemp is on familiar, solid ground. At this point, he still stops short of going on the attack, but if it becomes necessary, he clearly has laid a foundation that would rally the old Reaganaut army. When Kemp didn’t say anything last month -- when Gingrich went on the Rush Limbaugh show to announce the GOP’s primary goal in the century ahead would be to pay off the national debt -- we wondered if the party would go into deep freeze for 100 years. Now, at least there are signs of life, maybe even a fight. And by the way, it did not hurt that the voters in France Sunday kicked out their budget-balancers. If Gingrich and Lott don’t get their supply-side act together, the voters next year will have no reason to keep them around either.